entity choice

There are other advantages and disadvantages for each entity type. Today I will discuss just one advantage of a Limited Liability Company (LLC) over a corporation. First a little background.

By default an LLC with one owner is ignored as a separate entity. The one owner LLC’s income and deductions are reported on its owner’s income tax return. When there are two or more owners, an LLC is taxed by default as a partnership. But these are the defaults. Quite a while back IRS decided to let LLCs (and some other entities) choose how to be taxed. So an LLC can elect, by filing a form with IRS in a timely manner, to be taxed as a regular corporation (by filing Form 8832) or as an S corporation (by filing Form 2553).

If you want your new company to be taxed as a corporation, why not just form a corporation? Good question. Generally a corporation has to have an annual stockholders meeting even if there is only one stockholder. The stockholder(s) need to elect the board of directors and approve some corporate actions. The board of directors needs to have a meeting and elect officers. The board occasionally meets to approve certain actions. For example, the board may need to approve the company changing banks, the salary of officers, bonuses, and transactions between the company and its stockholders.

The meetings may sound simple but the company must send out notice to eligible participants several days to weeks before the meeting. As an alternative, the corporation can get everyone to sign off waiving advance notice. Then the meetings have to be documented in the company minutes. Generally, even a company owned by one stockholder has to have these meetings and prepare minutes. That is a lot of paperwork to get agreement with yourself. Failure to follow these corporate rules may make it easier for someone suing the company to “pierce the corporate veil” and get at the stockholder(s) personal assets.

On the other hand, LLCs generally do not require annual meetings, minutes and so forth. The LLC can certainly require these steps if it so chooses and if you have a lot of LLC members then it is probably a good idea. However, if only one person is the owner, is it really necessary? Only crazy people will sue themselves because they do not agree with something they themselves did.

Therefore, creating an LLC to be taxed as a corporation can save some administrative paperwork versus forming a corporation.